POLICY: The Three Percent Myth By Eric Novack M.D.

As the premier health policy blog on the net, I am honored that Matthew has asked me to occasionally guest post here. I also am regularly impressed with
  the level of thought and knowledge of so many posters of comments.
  Every once in a while, I think it is important to review, what I would believe
  so basic myths about our healthcare system. One of the greatest myths is the
  3% overhead myth for medicare. (This is often also cited as the 2% overhead
  Argument one in favor of the ‘medicare for all’ expansion of government
  regulated healthcare is the disparity in overhead between Medicare and private
  insurance plans. The Medicare overhead number is stated as 2% or 3%, depending
  upon where you read it. The overhead for private insurers is stated as 15%-25%.
  The disparity is used to explain the statement that, “if we just take the
  amount spent on wasted overhead and apply it to medicare-for-all, we could easily
  pay for everyone to be covered”. Where does that math come from? Here’s
  the brief skinny:
  $2 trillion in healthcare. 50% from private sector= $1trillion. Reduce overhead
  by 15-20%= $150- $200 billion available.
  Oh, if it was so simple.
  Let’s attack the 3% myth.

Proponents say overhead should be calculated as: admin costs/ payout for services.
  However, medicare recipients use much more care, on average, than younger groups.
  So, for example (made up numbers), medicare recipients might use $5000 per year,
  while commercially insured people might use $3000 per year. If both groups consisted
  of 10,000 people, it would take the same amount of oversight, management, etc.,
  yet the perceived overhead to take care of the younger group would be much higher;
  or put the other way, medicare overhead would be much lower.Solution: calculate overhead on a ‘per enrollee’ scale. This alone
  accounts for 50% of the discrepancy in overhead between medicare and private
  payers. If you do not believe me, just check with the Kaiser Foundation research
  saying the same thing.
  Proponents focus on the low administrative costs, on the one hand, while denouncing
  the amount of fraud by hospitals, providers. This perhaps is because medicare  does not spend enough on administrative oversight of the program. This happens to be exactly what the GAO and the National Academy of Social Insurance has  said within the past 6 years. So, if medicare spent more on administration,
  the discrepancy would be decreased even further.
  Proponents fail to account that for every regulation, costs are incurred by
  providers to comply. The 100,000 plus pages of medicare regulations function
  as an unfunded mandate on providers. Currently, the coding is based on ICD-9,
  which has over 24,000 codes. ICD-10, slated to go into effect within the next
  2 years has over 207,000!!!! And does upgrading for the change count toward medicare overhead? Of course not.
  Proponents say that private insurance company rules would create as much hassle
  for providers. Perhaps, but we will never know since private insurance rules
  are based off of the medicare guidelines.
  Thus, the ‘medicare 3% myth’, is, in reality, just that: a myth.

But like most myths, true believers will never pay attention to facts.

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